In a number of my previous articles, I have mentioned about the next mega trend that is all set to hit the industry which is the Internet of Things (IoT). Because of its magnanimity, every major company is attempting to grab a share by beefing up its product portfolio. The latest addition to this category of companies is Amazon (AMZN), an online retail giant that has attempted to penetrate the growing smartphone market by introducing the Fire phone. However, this much hyped phone has failed to live up to the expectations as indicated by the sales numbers.

A fiery launch

On June 18, when Amazon CEO Jeff Bezos launched the Fire phone with innovative features like a quasi 3D-screen and instant access to live customer support, the tech aficionados appreciated the novelty exhibited by the company in building its first smart device. Forward to today and it seems that the phone might have been quite over-hyped in the first place. These phones have been available for delivery since July 25, and this means that Amazon.com has started taking reviews on the phone, and its best sellers' list now reflects sales instead of just orders. Since the time Amazon has commenced delivery, the Fire phone has continuously tanked on the best seller’s list and now floats in the lowly 60s-100s in the best sellers’ list in electronics.

It is not quite worthwhile for me to discuss the potential reasons behind the tanking sales of Fire phone because scores of analysts have already covered this aspect. However, my intent is to caution the investors from expecting a healthy revenue boost from the sale of Fire phones. Therefore, the estimates made by analysts with respect to the positive earnings impact that the sale of Fire phones would have will fade. Even though the Fire phone promises a bunch of novel features, Amazon has erred in pricing the phone thereby leading to prospective customers asking about the value for money aspect.

An inconsistent bottomline

Over the last few years, Amazon has repeatedly reported a weak bottomline as the company’s profit margin, free cash flow, and net income have all plummeted. In the second quarter of 2014, Amazon’s net sales rose around 23% y-o-y to $19.34 billion as was expected by the market analysts. However, the company reported a loss of $126 million, much worse than the expected $70 million loss owing to massive price cuts in its Amazon web services cloud business. Additionally, the company expects to lose around $810 million in the third quarter which is colossal when compared to a loss of $25 million in the prior year period.

It is important to understand that while Amazon has grown its revenue at an average rate of 31% per year over the past few years, its bottomline growth has been dismal. One of the reasons behind this phenomenon is a significant change in Amazon’s sales mix. As per data, the company’s sales mix has shifted from being occupied by media to electronics and general merchandise in the recent years. Now, the recent downturn in global economy has pushed down the growth in International electronics and general merchandise as a result of which Amazon’s income from operations has been hit and is poised to grow at a slower rate.

Fire phone might add to existing woes

One of the negative implications of the continuing losses is that the market has taken watch and is now getting restless to see profits. In fact, a decline of approximately 9% in the stock price after Amazon reported its second quarter results is a testimony to the fact that investors are expecting some stabilization in the bottomline growth. Even though the CEO Mr. Jeff Bezos believes that short-term profitability isn’t a concern for Amazon and that it is making big investments with a long term perspective, the Street is not comfortable with burgeoning losses.

Though it is early to make conclusive opinions about the performance of Fire phones but the early trend is definitely not encouraging and if the demand does not pick up then it would add another unprofitable product line to Amazon’s kitty. In my opinion, prospective investors should not pick a position in the stock for now till there is reasonable sustainability in Amazon’s overall profitability.

About the author:

Riddhi Kharkia

A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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